Broadband Telecommunications for the 21st Century: A Legislative Report Card

Five
bills currently before Congress attempt to address the shortage of
high-speed telecommunications capacity, especially for accessing
the Internet. The demand for such "broadband" services is
skyrocketing, as Peter Huber, a Senior Fellow at the Manhattan
Institute for Policy Research, explained to Congress last March:
"Demand for digital bandwidth is increasing at annual rates in the
range of 50 to 200 percent." And that demand "will increase at
least five-fold over the next few years." Unfortunately, as Huber
noted, the "existing phone, cable, broadcast, wireless, and
satellite networks still rely on yesterday's analog technology."
Already at capacity, they cannot handle an increase in demand.

This
"broadband crisis" is generating concern that telecommunications
firms will not roll out broadband services in a timely fashion to
all Americans. But not all of the five proposals before Congress
will help solve the problem or spur investment in new
telecommunications technologies and services. Indeed, several
policymakers advocate continuing today's outdated and unworkable
regulatory regime of price controls, entry barriers,
line-of-business controls, geographically divided markets, and
restricted choice--practices that to a large extent created the
very problem they seek to solve. The heavy-handed, highly intrusive
complex system of telecommunications regulations is merely another
example of a misguided industrial policy that will thwart
investment, innovation, competition, and entrepreneurialism.

An
alternative to this outdated framework1 is based on five
core principles of market-based economics that enabled the small
niche market of high-tech computing to grow into America's largest
and most innovative export-enhancing and job-producing industry
over a 20-year span. Principles such as deregulation and free
markets, legal simplicity and stability, uniformity and regulatory
parity, a single open market system, and regulatory agency
constraint accompanied a generally "hands-off" approach to
regulating the industry. Simple, uniform, and time-tested
standards, such as strict contract enforcement, patent and
trademark protection, property rights, voluntary standard-setting
and common law resolution of disputes, and a free and open national
market, greatly enhanced this approach.

The
same approach can facilitate the rapid evolution and deployment of
broadband technology and services across America. Change may well
be the only constant in today's communications industry. Markets
once thought closed to competition are becoming highly competitive,
and there is no longer an "essential facility" or "bottleneck
monopoly" restraining telecommunications, let alone the broadband
data sector.

Congress should ensure that any
telecommunications legislation it considers incorporates the five
time-tested principles listed above, as well as the hands-off
approach that allowed today's vibrant and consumer-friendly
computer industry to evolve. By grading each bill based on the
degree to which it promotes regulation or deregulation, Congress
can discern the correct approach to telecommunications policy for
the future.

THE FIVE PROPOSED LEGISLATIVE
APPROACHES

Over
the past year, the combination of the public's desire for rapid
broadband deployment and caustic criticism of the
Telecommunications Act of 1996 and Federal Communications
Commission (FCC) regulatory activities captured the attention of
Congress. The five bills before Congress this session share several
characteristics, such as their attempts to encourage through
legislation the accelerated deployment of high-speed broadband and
Internet access--especially in rural areas. They all focus on
wireline broadband policy but do little to promote reforms
that will encourage additional wireless broadband
deployment. They also fail to address such broad issues as the
overall powers of the FCC or the existence of various regulatory
distinctions and asymmetrical legal treatment of the technologies.
Essentially, these bills are pragmatic attempts to keep the
existing legal framework intact and deal with a comprehensive
industry crisis in a limited and restrained fashion.

Grading the Bills

Despite such limitations, however, the
Internet Regulatory Freedom Act of 1999 (S. 1043), sponsored by
Senator John McCain (R-AZ), and the Internet Freedom and Broadband
Deployment Act of 1999 (H.R. 2420), sponsored by Representatives
Billy Tauzin (R-LA) and John Dingell (D-MI), do attempt to
deregulate the broadband data market, offer greater freedom to
communications carriers, and adopt a more hands-off approach to
high-speed data transmission.

By
comparison, the Broadband Internet Regulatory Relief Act of 1999
(S. 877) sponsored by Senators Sam Brownback (R-KS), Don Nickles
(R-OK), and Larry Craig (R-ID); the Internet Freedom Act of 1999
(H.R. 1686) sponsored by Representatives Bob Goodlatte (R-VA) and
Rick Boucher (D-VA); and the Consumer and Community Choice in
Access Act of 1999 (H.R. 2637) sponsored by Representative Earl
Blumenauer (D-OR) would allow the government to micromanage and
further regulate the deployment process.

Congress should examine how each of these
bills would enhance the accessibility and functionality of the
broadband market. To do so, Congress should apply the following
four standards that, at minimum, a telecommunications bill should
meet:

Regulatory freedom.
The Bell operating companies, like all other carriers, should be
free to transport data (or non-voice traffic) across long-distance
boundaries.

Freedom from mandatory access for
incumbent carriers.
Incumbent local exchange carriers should be free from mandatory
forced access, unbundling, and resale requirements regarding the
transmission of data (or any non-voice traffic).

Freedom from mandatory access for other
carriers.The cable industry or any other sector of the communications
industry should be free from mandatory forced access, unbundling,
and resale requirements.

Freedom from state and local
interference.
State and local actions that would interfere with the smooth
rolling out of broadband services should be prohibited.

As
Table 2 shows, using these restrictive, industry-specific criteria
to evaluate the bills produces very different grades.

S. 1043: Internet Regulatory Freedom Act
of 1999

S.
1043, introduced by Senator John McCain (R-AZ), takes the most
straightforward and deregulatory approach to broadband
telecommunications policy. It satisfies the first two criteria by
offering Bell operating companies regulatory freedom to provide
Internet and advanced telecommunications services across
long-distance (or InterLATA) boundaries. And it ensures that
mandatory open access, unbundling, and resale requirements are not
imposed on communications companies seeking to develop and/or
deploy broadband services. The McCain bill defines "Internet
services" broadly as:

1)
the transmission of writing, signs, pictures, or sounds by means of
the Internet or any other network that includes Internet
protocol-based or other packet-switched or equivalent technology,
including the facilities and equipment exclusively used to provide
those services; and, (2) the transmission of data between a user
and the Internet or such other network.

The
proposal would not interfere with the requirements of the
Telecommunications Act to allow open access, unbundling, and resale
activities in narrowband telephony; however, it would quarantine
the Internet as well as broadband services and technologies from
such burdensome regulations. Thus, claims that the bill represents
a back-door attempt to "reopen the Telecom Act" have no merit.

By
defining Internet services broadly, S. 1043 satisfies the third
criterion and ensures that the FCC will not be able to impose
forced access, unbundling, and resale requirements on
communications carriers, including cable providers. It also
satisfies the forth criterion by keeping the national broadband
market free of unnecessary state and local interference. In
specifying that a "provider of Internet services may not be
considered to be a carrier providing intrastate communication
service," it essentially preempts state and local regulation of
broadband deployment and Internet transactions.

The
McCain bill satisfies the minimum criteria, but it could be
improved by expanding its deregulatory framework to cover all
industry sectors. Of the bills currently before Congress, the
McCain bill receives an "A" grade for its straightforward
deregulatory approach to broadband policy.

H.R. 2420: Internet Freedom and Broadband
Deployment Act of 1999

H.R.
2420, introduced by Representatives Billy Tauzin (R-LA), chairman
of the House Commerce Committee's Subcommittee on
Telecommunications, Trade and Consumer Protection, and John Dingell
(D-MI), the Commerce Committee's ranking minority member, is
another respectable attempt to provide additional freedoms to
operate in the broadband market. However, it also has a few
technical flaws.

Regarding long-distance restrictions on
data services, H.R. 2420 would give the Bell operating companies
complete freedom to offer broadband services across artificial
boundaries, or local access and transport areas (LATA), as long as
they do not carry voice-based traffic across those boundaries until
other conditions are met.

Regarding the second and third criteria,
H.R. 2420 limits the authority of the FCC and the states to
regulate the "rates, charges, terms, or conditions for, or entry
into the provision of, any high-speed data service or
Internet-access service," or the facilities used to provide such
service. Resale and mandatory unbundling requirements will not be
imposed on high-speed data offerings by cable companies or other
communications carriers.

However, H.R. 2420 has two important
weaknesses. First, it defines "high speed data services" somewhat
more narrowly than the McCain bill does by including "the offering
of a capability to transmit, using a packet-switched or successor
technology, information at a rate that is generally not less than
384 kilobits per second in at least one direction." This 384
kilobit-per-second threshold may artificially limit the deployment
of certain data services that do not initially offer greater
capacity. This restriction should be eliminated to prevent an
arbitrary threshold for data service deregulation.

Second, although it provides freedom from
resale and unbundling requirements for data transmission, the
Tauzin-Dingell bill would require incumbent local exchange carriers
to provide Internet users with access to any Internet service
provider (ISP) if need be. To do so, it requires incumbent carriers
to provide ISPs with the "right to acquire the facilities and
services necessary to interconnect with such carrier's high speed
data service for the provision of Internet access service;
and...the ability to collocate equipment...to the extent necessary
to achieve [these] objectives...." This provision would mean that
incumbent local exchange carriers would have to take steps to
provide ISPs with easy access to customers through their network
without going so far as to demand that the local carriers provide
full-blown open access or unbundled network elements to competitors
at a discounted resale rate. This is not an overly burdensome
requirement, but it does interefere unnecessarily with the free
market.

The
opening line of H.R. 2420 satisfies the fourth criterion on state
and local interference in its opening line by stating that
"Internet access services are inherently interstate and
international in nature, and should therefore not be subject to
regulation by the States."

Compared with the other bills, the
Tauzin-Dingell bill's pro-deregulation approach deserves a "B"
grade despite its minor flaws.

S. 877: Broadband Internet Regulatory
Relief Act of 1999

The
Brownback-Nickles-Craig bill, S. 877, takes a more cautious and
less deregulatory approach to broadband deployment. First, it
contains no provision to grant the Bells the freedom to transport
data across long-distance (InterLATA) boundaries to their
customers. This is significant. Second, it defines "advanced
services" narrowly as

a communications service or combination of
such services providing a digitally encoded signal downstream from
a provider at a rated speed of 200 kilobits per second or above and
upstream from a consumer to a provider at a rated speed of 128
kilobits per second or above for access to the Internet or other
interstate information and data services.

Detailed definitions like this one are
likely to create unnatural thresholds within the broadband
marketplace that could delay deployment of service in certain
areas.

S.
877 also creates a cumbersome process through which local exchange
carriers can gain freedom from the forced access, unbundling, and
mandatory resale requirements of the Telecommunications Act in
order to provide advanced services. Local exchange carriers can
escape infrastructure-sharing requirements for new broadband
offerings only by making 70 percent of the system within a given
state "digital subscriber line" (DSL) capable. This means that 70
percent of the incumbent telephone company's network would have to
be capable of carrying advanced services before deregulation could
occur, as narrowly defined above.

It
is unclear why such an artificial distinction or subjective
threshold should be employed to determine when deregulation should
occur, especially when the ILECs' competitors do not face the same
burdens. The Brownback bill would only add to the lack of parity in
the communications market by giving cable competitors and others an
advantage over incumbent phone carriers. This is ironic because
cable competitors have made significant gains already in the
high-speed data market.

H.R. 1686's
Conditions for Offering Broadband Services

Within 180 days after the effective date of this section, each
local exchange carrier shall submit to the State commission in each
State in which such carrier does business a plan to provide
broadband telecommunications service in all local exchange areas in
which such carrier has telephone exchange service customers as soon
as such broadband telecommunications service is economically
reasonably and technically feasible. The plan shall include all
terms and conditions, including pricing, under which the services
shall be provided. The test of economic reasonability and technical
feasibility shall be made separately by the local exchange carrier
for each local exchange, and the plan shall be considered certified
45 days after submission unless the State commission rejects the
plan within such 45 days. Upon rejection of a plan, successive
plans shall be submitted until approval is obtained. The plan shall
be implemented within 180 days of the certification of the plan in
each local exchange in which the provision of the service is both
economically reasonable and technically feasible. Upon
certification of its plan, the carrier shall be obligated by terms
of the plan (including any modifications that it requests that are
thereafter certified) but shall otherwise provide such services
free of Federal and State price, rate, rate of return, and profit
regulation. Upon a determination by the State commission that a
local exchange is served by another provider of broadband
telecommunications services, or any broadband Internet access
transport provider, or upon a determination by such State
commission that the local exchange carrier makes broadband
telecommunications services available to 70 percent of the access
lines in an exchange, a local exchange carrier shall no longer be
obligated by the terms of any such plan in such local exchange.

Although the sponsors of S. 877 may hope
that this requirement encourages local exchange carriers to roll
out advanced broadband services on a timely basis, it may in fact
discourage them. They may fear falling short of the artificial 70
percent threshold. This could occur given the reluctance of the
bill's sponsors to offer carriers full pricing flexibility for
advanced services until they petition the FCC and receive relief
from price regulation.

Deregulation should be unconditionally
granted so that carriers can provide broadband services on whatever
schedule and by whatever method they feel is most appropriate.
Although the Brownback bill takes a cumbersome, micromanaged
approach to data deregulation for local carriers, it does not
include resale or forced access mandates for cable companies or
other broadband providers.

S.
877 is somewhat unclear regarding state and local preemption of
broadband services. Although regulation of advanced service
offerings by ILECs outside their territory is preempted,
incumbent carriers are granted freedom from state regulation in
their territory only after other requirements are satisfied. Also,
the bill does not make clear whether cable or other broadband
providers can escape unjustifiable state and local regulatory
efforts.

S.
877, then, takes a half-hearted approach to deregulation. Compared
with the other bills, it earns a grade of "C."

H.R. 1686: Internet Freedom Act of
1999

H.R.
1686, sponsored by Representatives Bob Goodlatte (R-VA) and Rick
Boucher (D-VA), was introduced in the House Commerce Committee. Its
companion bill, the Internet Growth and Development Act of 1999
(H.R. 1685), was introduced in the Judiciary Committee.

These bills contain virtually identical
language on broadband deployment policy. They essentially sanction
regulatory blackmail in order to force telephone companies to roll
out broadband services, defined as "transmission services in excess
of 200 kilobits per second in at least one direction." Although
they grant Bell operating companies the freedom to transmit data
across InterLATA boundaries, H.R. 1685/1686 would allow local
exchange carriers to offer broadband services only after they have
met meticulously detailed conditions (see box on Page 5).

It
shall be unlawful for a broadband access transport provider to
engage in unfair methods of competition or unfair or deceptive acts
or practices, the purpose or effect of which is to discriminate in
favor of a service provider that is affiliated with a broadband
access transport provider or to restrain unreasonably the ability
of a service provider that is not affiliated with a broadband
access transport provider from competing in its provision of any of
the services provided by a service provider....

Although this stipulation may sound
harmless, in practice it would be devastating since it essentially
makes exclusive relationships in the broadband market impossible.
In other words, no broadband provider could offer exclusive,
bundled services. This could make risky and expensive investments
up front less likely, for fear of the provider's not being able to
recoup the initial costs over time.

ILECs are granted freedom from state and
local regulation, but only after they satisfy the meticulously
detailed deployment plan outlined in the sidebar. Finally, the
bills do not make clear whether other carriers would be granted
freedom from state and local interference as well.

H.R.
1685 and H.R. 1686 represent heavy-handed efforts to micromanage
specific market outcomes by providing minimal and conditional
deregulation of certain services and imposing regulatory burdens on
new broadband carriers. Their only redeeming quality lies in the
long-distance (InterLATA) freedoms they offer the Bell operating
companies. Therefore, compared with the other four bills, the
Goodlatte-Boucher bills' pro-regulatory framework earns a "D."

H.R. 2637: Consumer and Community Choice
in Access Act of 1999

Although H.R. 2637, introduced by
Representative Earl Blumenauer (D-OR), is not a comprehensive
broadband telecommunications bill, it is important because it would
impose new regulations on cable providers in the name of "broadband
access." The measure may well be the worst possible solution to the
broadband crisis since it proposes more rather than fewer
regulations. And although H.R. 2637 does not specify whether
incumbent local exchange carriers will be subject to forced access,
unbundling, or resale rules, it does demand that the FCC take steps
to treat broadband access to the Internet over cable systems as a
communications service subject to forced access rules:

The
Commission may require cable operators that provide
interconnection, using cable system facilities, with the Internet
to offer such interconnection on terms and conditions that are
fair, reasonable, and nondiscriminatory. Such requirements shall
include the obligation to provide direct or indirect
interconnection with the facilities and equipment of any Internet
service provider on terms and conditions that are functionally and
economically equivalent to the interconnection provided to any
other Internet service provider, whether or not affiliated with the
cable operator.2

The
Blumenauer bill takes a step backward in its approach to
jurisdictional matters by stating that "Nothing in this Act
restricts or limits the authority of a State or local franchising
authority." In other words, H.R. 2637 encourages state and local
regulators to take actions that overlap federal efforts. The bill's
approach could be summarized as "When in doubt, impose more
regulation." Although its argument for openness and
non-discriminatory access will likely appeal to some policymakers,
they are merely code words for additional industry regulation.
Therefore, based on the criteria above and compared with the other
bills before Congress, the pro-regulatory Blumenauer bill deserves
a dismal "F."

CONCLUSION

Of
the legislative approaches available to Congress at this time, only
the proposals in Senator McCain's bill (S. 1043) offer unfettered
deregulatory freedom that would encourage increased wireline
broadband growth in the near term. The Tauzin-Dingell bill (H.R.
2420) provides a fair degree of deregulation and ensures an open
market for broadband deployment. It therefore ranks a close second
behind S. 1043. These bills are still not comprehensive enough, but
they do build on the computer industry's hands-off model described
in "Broadband Telecommunications Policy for the 21st Century: Five
Principles of Reform."

Regrettably, the other bills reject this
model in favor of the present system of managed competition, or
deregulatory industrial policy. The Brownback-Nickles-Craig bill
(S. 877) would merely tweak current regulations in an effort to
provide incentives for broadband rollout. The Goodlatte-Boucher
bills (H.R. 1685/1686) take the regulatory micromanagement approach
to greater lengths, while the Blumenauer bill (H.R. 2637) would
impose new regulatory burdens and offer no relief from the current
regulations. In sum, these measures are a stunning example of the
"unbounded regulatory hubris" that critics argue pervades
communications policymaking today.3

Although policymakers fear reopening the
telecommunications debate just a few years after passage of the
Telecommunications Act, they will be forced to do so as
technologies advance and industries converge to erode traditional
regulatory distinctions. The broadband bills they are now
considering attempt to provide a limited amount of temporary relief
from the regulatory burdens caused by the Telecommunications Act as
well as other laws and regulations. Congress should not be content
to apply the Act's outdated vision of industry regulation to the
technologies of the 21st century when a superior, open-market model
based on the experience of the vibrant computer industry is
available.

Over
the short term, the McCain and Tauzin-Dingell bills, in particular,
could help to alleviate certain regulatory problems. But the
broadband crisis should serve as a wake-up call that additional,
far more comprehensive actions are needed--and soon--to correct the
inefficiencies created by intrusive regulatory standards and
illogical distinctions that are driving telecommunications policy
today.

Adam D. Thierer
is a former Alex C. Walker Fellow in Economic Policy in
the Thomas A. Roe Institute for Economic Policy Studies at the
Heritage Foundation.

ACRONYMS IN THE BROADBAND TELECOM
BILLS

BOCs:
Bell Operating Companies. Seven major local exchange companies
(LECs) created after the 1982 AT&T divestiture. Regional Bell
operating companies (RBOCs) are prohibited from offering
long-distance services over local access and transport area (LATA)
boundaries. The Telecommunications Act of 1996 requires the RBOCs
to offer interconnection to (and discounted resale of access to)
their networks. The original Baby Bells included Ameritech, Bell
Atlantic, Bell South, Nynex, Southwestern Bell, Pacific Telesis,
and U.S. West. Mergers between the Bells resulted in four Baby Bell
conglomerates--Ameritech-SBC-Pacific Telesis, Bell Atlantic-Nynex,
U.S. West, and Bell South. RBOCs traditionally acted as holding
companies for smaller LECs, but in recent years have moved to
integrate business operations under the main company.

CLECs:
Competitive Local Exchange Carriers. Following passage of the
Telecommunications Act of 1996, these carriers rose up to compete
with ILECs to provide local service. Some offer service over their
own facilities; but most, under Section 251 of the Act, offer
repackaged telephone access services purchased from other
providers.

DSL:
Digital Subscriber Lines. Services include a range of new
telephone offerings, dramatically increasing the capacity of
copper-based telephone lines through digital transmission
techniques. RBOCs, in particular, look to DSL technologies as a way
to offer increased high-speed data and Internet capacity in the
home or office without requiring expensive new lines or
technologies.

LATA:
Local Access and Transport Areas. The artificial geographic
boundaries established after the AT&T divestiture that
determine an RBOC's service area. Local Baby Bells are allowed to
handle all intraLATA telephone traffic within their LATA. There are
nearly 200 LATA regions in the United States. Under the terms of
the divestiture, IXCs or long-distance companies (not RBOCs) handle
interLATA traffic. This requirement was intended to limit the
RBOCs' supposed market power, although it also greatly limits
service options available to consumers.

LECs:
Local Exchange Carriers. Traditional providers of local telephone
service for residential and many business customers. Carry the
majority of wireline telephone traffic to residential Americans
through a network of central switching offices and local loops to
the home. The largest LECs are the RBOCs and GTE Corporation, but
more than 1,000 smaller LECs exist to provide service to rural
America.